SEC to regulate crowd-funding

The Securities and Exchange Commission is set to regulate crowd-funding activities in the country to protect the investing public from the abuse of fund-raising innovations typically designed for start-up companies.

Crowd-funding refers to a method of fund-raising whereby money is sourced from a large number of individuals usually through an online platform. This method allows investors to obtain access to investment opportunities and enables business start-ups and small and medium-sized enterprises (SMEs) to access a new source of funding for their investment and operations through the internet.

In a press statement, the SEC said it would release the draft rules and regulations governing crowd-funding for public feedback.

The SEC proposed rules will govern lending-based and equity-based crowd-funding. Under the proposed framework, the SEC will require registration and full disclosure of the issuer, intermediary (registered persons, funding portal) and platform. It will also prescribe disclosure requirements for issuers, general requirements for intermediaries and registration of funding portals.

The rules will also set a threshold as to the amount of funding to be raised thru crowdfunding. The cap is proposed at P10 million within a 12-month period.

The SEC also proposes prohibition on advertising the terms of offering. The framework will also include measures to reduce risk of fraud and manipulation.

The proposed framework will also include provisions on conditional safe harbor, under which certain limited activities would be deemed consistent with the prohibitions on funding portals.

The SEC also plans to restrict access to crowd-funding activities to qualified investors. The investor qualification will be defined by the framework.

The rules will also require parties to provide instructions on the following:
-provision of educational materials to investors;
-provision of instructions on maintenance and transmission of funds; and,
-provision of instructions on completion of offerings, cancellations and reconfirmations.

Typically, the crowd-funding model involves three parties: the entrepreneur (or the project initiator who proposes the business or the project; the supporters, defined as individuals or groups of individuals who are willing to fund or support the idea or the project and; the platform (or a moderating organization which is a virtual marketplace that brings the parties together for launching the project.

Supporters of the idea or project make their contributions or donations via online platforms. Thereafter, the platforms coordinate and administer the fundraising activities.

Generally, there are four identified forms of crowdfunding:
– Donation-based crowdfunding: individuals pool their resources to support a charitable cause;
– Reward-based crowdfunding: individuals give money to a company in return for a “reward”, usually a product produced by the company;
– Lending-based crowdfunding: individuals lend money to a company and receive the company’s legally-binding commitment to repay the loan at pre-determined time intervals and interest rate; and,
– Equity-based crowdfunding: individuals invest in shares sold by a company and receive a share of the profits in the form of a dividend or profit distribution, subject to the company’s discretion.